Annual Report




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016, or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____

Commission file number 000-09341

SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

UTAH
87-0345941
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

5300 South 360 West, Suite 250 Salt Lake City, Utah
84123
(Address of principal executive offices)
(Zip Code)
   
Registrant's telephone number, including area code:
(801) 264-1060

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: None

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

Title of each class
Name of each exchange on which registered
Class A common stock, $2.00 Par Value
NASDAQ National Market
Class C common stock, $2.00 Par Value
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ]   No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ]   No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]   No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ]
Accelerated filer [  ]
Nonaccelerated filer [  ]
Smaller reporting company [X]
(Do not check if a smaller reporting company)    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of June 30, 2016, the aggregate market value of the registrant's Class A common stock held by non-affiliates of the registrant was $22,000,000 based on the $4.66 closing sale price of the Class A common stock as reported on The Nasdaq National Market.

As of March 27, 2017, there were outstanding 13,820,079   shares of Class A common stock, $2.00 par value per share, and 1,901,624 shares of Class C common stock, $2.00 par value per share.

Documents Incorporated by Reference

None.

 
Security National Financial Corporation
Form 10-K
For the Fiscal Year Ended December 31, 2016

TABLE OF CONTENTS

    Page
Part I
   
     
Item 1.
Business
3
     
Item 2.
Properties
10
     
Item 3.
Legal Proceedings
13
     
Item 4.
Mine Safety Disclosures
15
     
Part II
   
     
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15
     
Item 6.
Selected Financial Data
17
     
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
18
     
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
32
     
Item 8.
Financial Statements and Supplementary Data
32
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
102
     
Item 9A.
Controls and Procedures
102
     
Item 9B.
Other Information
103
     
Part III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
104
     
Item 11.
Executive Compensation
109
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
120
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence
120
     
Item 14.
Principal Accounting Fees and Services
121
     
Part IV
   
     
Item 15.
Exhibits, Financial Statement Schedules
121

2

PART I

Item 1.  Business

Security National Financial Corporation (the "Company") operates in three main business segments: life insurance, cemetery and mortuary, and mortgages. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products, and accident and health insurance. These products are marketed in 38 states through a commissioned sales force of independent licensed insurance agents who may also sell insurance products of other companies. The cemetery and mortuary segment consists of eight mortuaries and five cemeteries in the state of Utah and one cemetery in the state of California. The Company also engages in pre-need selling of funeral, cemetery, mortuary and cremation services through its Utah and California operations. Many of the insurance agents also sell pre-need funeral, cemetery and cremation services. The mortgage segment originates and underwrites or otherwise purchases residential and commercial loans for new construction, existing homes and other real estate projects. The mortgage segment operates through 170 retail and three wholesale offices in 28 states, and is an approved mortgage lender in several other states.

The Company's design and structure are that each business segment is related to the other business segments and contributes to the profitability of the other segments. The Company's cemetery and mortuary segment provides a level of public awareness that assists in the sales and marketing of insurance and pre-need cemetery and funeral products. The Company's insurance segment invests their assets (including, in part, pre-paid funeral products and services) in investments authorized by the respective insurance departments of their states of domicile. The Company also pursues growth through acquisitions. The Company's mortgage segment provides mortgage loans and other real estate investment opportunities.

The Company was organized as a holding company in 1979, when Security National Life Insurance Company ("Security National Life") became a wholly owned subsidiary of the Company and the former stockholders of Security National Life became stockholders of the Company. Security National Life was formed in 1965 and has acquired or purchased significant blocks of business which include Capital Investors Life Insurance Company (1994), Civil Service Employees Life Insurance Company (1995), Southern Security Life Insurance Company (1998), Menlo Life Insurance Company (1999), Acadian Life Insurance Company (2002), Paramount Security Life Insurance Company (2004), Memorial Insurance Company of America (2005), Capital Reserve Life Insurance Company (2007), Southern Security Life Insurance Company, Inc. (2008), North America Life Insurance Company (2011, 2015), Trans-Western Life Insurance Company (2012), Mothe Life Insurance Company (2012), DLE Life Insurance Company (2012), American Republic Insurance Company (2015) and First Guaranty Insurance Company (2016).

The cemetery and mortuary operations have also grown through the acquisition of other cemetery and mortuary companies. The cemetery and mortuary companies that the Company has acquired are Holladay Memorial Park, Inc. (1991), Cottonwood Mortuary, Inc. (1991) and Deseret Memorial, Inc. (1991).

In 1993, the Company formed SecurityNational Mortgage Company ("SecurityNational Mortgage") to originate and refinance residential mortgage loans. In 2012, the Company formed Green Street Mortgage Services, Inc. (now known as EverLEND Mortgage Company) ("EverLEND Mortgage") also to originate and refinance residential mortgage loans.

See Note 14 of the Notes to Consolidated Financial Statements for additional information regarding business segments of the Company.

Life Insurance

Products

The Company, through Security National Life, issues and distributes selected lines of life insurance and annuities. The Company's life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident and health insurance products. The Company places specific marketing emphasis on funeral plans through pre-need planning. The Company's other insurance subsidiaries, First Guaranty Insurance Company ("First Guaranty"), Memorial Insurance Company of America ("Memorial Insurance"), Southern Security Life Insurance Company, Inc. ("Southern Security") and Trans-Western Life Insurance Company ("Trans-Western"), service and maintain policies that were purchased prior to their acquisition by Security National Life.
3


A funeral plan is a small face value life insurance policy that generally has face coverage of up to $25,000. The Company believes that funeral plans represent a marketing niche that has lower competition because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person's death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.

Markets and Distribution

The Company is licensed to sell insurance in 38 states. The Company, in marketing its life insurance products, seeks to locate, develop and service specific niche markets. The Company's funeral plan policies are sold primarily to persons who range in age from 45 to 85 and have low to moderate income. A majority of the Company's funeral plan premiums come from the states of Arkansas, California, Florida, Georgia, Louisiana, Mississippi, Missouri, Texas and Utah.

The Company sells its life insurance products through direct agents, brokers and independent licensed agents who may also sell insurance products of other companies. The commissions on life insurance products range from approximately 50% to 120% of first year premiums. In those cases, where the Company utilizes its direct agents in selling such policies, those agents customarily receive advances against future commissions.

In some instances, funeral plan insurance is marketed in conjunction with the Company's cemetery and mortuary sales force. When it is marketed by that group, the beneficiary is usually the Company's cemeteries and mortuaries. Thus, death benefits that become payable under the policy are paid to the Company's cemetery and mortuary subsidiaries to the extent of services performed and products purchased.

In marketing funeral plan insurance, the Company also seeks and obtains third-party endorsements from other cemeteries and mortuaries within its marketing areas. Typically, these cemeteries and mortuaries will provide letters of endorsement and may share in mailing and other lead-generating costs since these businesses are usually made the beneficiary of the policy. The following table summarizes the life insurance business for the five years ended December 31, 2016:

 
2016
     
2015
 
2014
 
2013
 
2012
   
Life Insurance                          
Policy/Cert Count as of December 31
   
531,775
 
(2
)
   
509,058
     
497,933
     
498,228
     
502,978
 
(1
)
Insurance in force as of December 31 (omitted 000)
 
$
1,672,081
 
(2
)
 
$
2,862,803
   
$
2,763,496
   
$
2,828,470
   
$
2,913,419
 
(1
)
Premiums Collected (omitted 000)
 
$
65,220
 
(2
)
 
$
55,780
   
$
52,418
   
$
50,009
   
$
48,168
     
 
_______________
(1)
Includes coinsurance with Mothe Life Insurance Company and DLE Life Insurance Company.
(2)
Includes the acquisition of First Guaranty Insurance Company and the termination of the reinsurance assumed for Servicemembers' Group Life Insurance ("SGLI").

Underwriting

The factors considered in evaluating an application for ordinary life insurance coverage can include the applicant's age, occupation, general health and medical history. Upon receipt of a satisfactory (non-funeral plan insurance) application, which contains pertinent medical questions, the Company issues insurance based upon its medical limits and requirements subject to the following general non‑medical limits:

Age Nearest
 
Non‑Medical
 
 Birthday
 
Limits
 
 0‑50
 
$
100,000
 
51‑up
 
Medical information required (APS or exam) 

When underwriting life insurance, the Company will sometimes issue policies with higher premium rates for substandard risks.
4

The Company's funeral plan insurance is written on a simplified medical application with underwriting requirements being a completed application, a phone inspection on the applicant, and a Medical Information Bureau inquiry. There are several underwriting classes in which an applicant can be placed.

Annuities

Products

The Company's annuity business includes single premium deferred annuities, flexible premium deferred annuities and immediate annuities. A single premium deferred annuity is a contract where the individual remits a sum of money to the Company, which is retained on deposit until such time as the individual may wish to annuitize or surrender the contract for cash. A flexible premium deferred annuity gives the contract holder the right to make premium payments of varying amounts or to make no further premium payments after his initial payment. These single and flexible premium deferred annuities can have initial surrender charges. The surrender charges act as a deterrent to individuals who may wish to prematurely surrender their annuity contracts. An immediate annuity is a contract in which the individual remits a sum of money to the Company in return for the Company's obligation to pay a series of payments on a periodic basis over a designated period of time, such as an individual's life, or for such other period as may be designated.

Annuities have guaranteed interest rates that range from 1% to 6.5% per annum. Rates above the guaranteed interest rate credited are periodically modified by the Board of Directors at their discretion. In order for the Company to realize a profit on an annuity product, the Company must maintain an interest rate spread between its investment income and the interest rate credited to the annuities. Commissions, issuance expenses and general and administrative expenses are deducted from this interest rate spread.

Markets and Distribution

The general market for the Company's annuities is middle to older age individuals. A major source of annuity sales come from direct agents and are sold in conjunction with other insurance sales. If an individual does not qualify for a funeral plan, the agent will often sell that individual an annuity to fund final expenses.

The following table summarizes the annuity business for the five years ended December 31, 2016:
   
2016
       
2015
   
2014
   
2013
   
2012
 
Annuities Policy/Cert Count as of December 31
   
21,364
 
(1
)
   
12,022
     
12,701
     
12,703
     
12,320
 
Deposits Collected (omitted 000)
 
$
11,019
 
(1
)
 
$
8,069
   
$
8,010
   
$
7,281
   
$
6,777
 

____________

(1)
Includes the acquisition of First Guaranty Insurance Company.

Accident and Health

Products

With the acquisition of Capital Investors in 1994, the Company acquired a small block of accident and health policies. Since 1999, the Company has offered a low-cost comprehensive diver's accident policy that provides worldwide coverage for medical expense reimbursement in the event of a diving accident.

Markets and Distribution

The Company currently markets its diver's accident policies through the internet.

The following table summarizes the accident and health insurance business for the five years ended December 31, 2016:

   
2016
   
2015
   
2014
   
2013
   
2012
 
Accident and Health Policy/Cert Count as of December 31
   
4,761
     
5,185
     
5,838
     
6,451
     
7,291
 
Premiums Collected (omitted 000)
 
$
113
   
$
119
   
$
133
   
$
144
   
$
158
 

5

Reinsurance

The primary purpose of reinsurance is to enable an insurance company to issue an insurance policy in an amount larger than the risk the insurance company is willing to assume for itself. The insurance company remains obligated for the amounts reinsured (ceded) in the event the reinsurers do not meet their obligations.

The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties, which are generally renewed annually. The premiums paid by the Company are based on a number of factors, primarily including the age of the insured and the risk ceded to the reinsurer.

It is the Company's policy to retain no more than $100,000 of ordinary insurance per insured life, with the excess risk being reinsured. The total amount of life insurance reinsured by other companies as of December 31, 2016, was $65,040,000, which represents approximately 3.9% of the Company's life insurance in force on that date.

See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Notes to Consolidated Financial Statements" for additional disclosure and discussion regarding reinsurance.

Investments

The investments that support the Company's life insurance and annuity obligations are determined by the investment committees of the Company's subsidiaries and ratified by the full Board of Directors of the respective subsidiaries. A significant portion of the Company's investments must meet statutory requirements governing the nature and quality of permitted investments by its insurance subsidiaries. The Company maintains a diversified investment portfolio consisting of common stocks, preferred stocks, municipal bonds, investment and non‑investment grade bonds, mortgage loans, real estate, short-term investments and other securities and investments.

See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Notes to Consolidated Financial Statements" for additional disclosure and discussion regarding investments.

Cemetery and Mortuary

Products

Through its cemetery and mortuary operations, the Company markets a variety of products and services both on a pre-need basis (prior to death) and an at-need basis (at the time of death). The products include: plots, interment vaults, mausoleum crypts, markers, caskets, flowers and other death care related products. These services include: professional services of funeral directors, opening and closing of graves, use of chapels and viewing rooms, and use of automobiles and clothing. The Company has a mortuary at each of its cemeteries, other than Holladay Memorial Park and Singing Hills Memorial Park, and has four separate stand-alone mortuary facilities.

Markets and Distribution

The Company's pre‑need cemetery and mortuary sales are marketed to persons of all ages but are generally purchased by persons 45 years of age and older. The Company is limited in its geographic distribution of these products to areas lying within an approximate 20-mile radius of its mortuaries and cemeteries. The Company's at-need sales are similarly limited in geographic area.

The Company actively seeks to sell its cemetery and funeral products to customers on a pre‑need basis. The Company employs cemetery sales representatives on a commission basis to sell these products. Many of these pre-need cemetery and mortuary sales representatives are also licensed insurance salesmen and sell funeral plan insurance. In some instances, the Company's cemetery and mortuary facilities are the named beneficiaries of the funeral plan policies.

Potential customers are located via telephone sales prospecting, responses to letters mailed by the pre-planning consultants, newspaper inserts, referrals, and door-to-door canvassing. The Company trains its sales representatives and helps generate leads for them. 
6

Mortgage Loans

Products

The Company, through its wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage, are active in the residential real estate market. SecurityNational Mortgage is approved by the U.S. Department of Housing and Urban Development (HUD), the Federal National Mortgage Association (Fannie Mae), and other secondary market investors, to originate a variety of residential mortgage loan products, which are subsequently sold to investors. EverLEND Mortgage is approved by the U.S. Department of Housing and Urban Development (HUD), and other secondary market investors, to originate a variety of residential mortgage loan products, which are subsequently sold to investors. The Company uses internal and external funding sources to fund mortgage loans.

Security National Life originates and funds commercial real estate loans, residential construction loans and land development loans for internal investment.

Markets and Distribution

The Company's residential mortgage lending services are marketed primarily to real estate brokers and some independent mortgage loan originators. The Company has a strong retail origination presence in the Utah, Florida, Nevada, and Texas markets in addition to three wholesale branch offices located in Florida, Texas and Utah, with sales representatives in these and other states. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Notes to Consolidated Financial Statements" for additional disclosure and discussion regarding mortgage loans.

Recent Acquisitions and Other Business Activities

Acquisition of First Guaranty Insurance Company

On July 11, 2016, the Company, through its wholly owned subsidiary, Security National Life, completed a stock purchase transaction with the shareholders of Reppond Holding Corporation, an Arkansas corporation ("Reppond Holding") and sole shareholder of First Guaranty Insurance Company, a Louisiana domestic stock legal reserve life insurance company ("First Guaranty"), to purchase all the outstanding shares of common stock of Reppond Holding. Under the terms of the stock purchase agreement, dated February 17, 2016, between Security Life and Reppond Holding, which was later amended on March 4 and 17, 2016, Security Life paid a total of $6,753,000 at the closing in consideration for the purchase of all the outstanding shares of stock of Reppond Holding from its shareholders.

Reinsurance Agreement with North America Life Insurance Company

On May 8, 2015, the Company, through its wholly owned subsidiary, Security National Life, signed a paid-up business offer under a coinsurance agreement that was effective December 1, 2010 to reinsure certain life insurance policies from North America Life Insurance Company ("North America Life"). Pursuant to the paid-up business offer, North America Life ceded and transferred to Security National Life all contractual obligations and risks under the coinsured policies. Security National Life paid a ceding commission to North America Life in the amount of $281,908. As a result of the ceding commission, North America Life transferred $8,900,282 of cash and $9,182,190 in statutory reserves, or liabilities, to Security National Life.

Reinsurance Agreement with American Republic Insurance Company

On February 11, 2015, the Company, through its wholly owned subsidiary, Security National Life, signed a coinsurance agreement to reinsure certain life insurance policies from American Republic Insurance Company ("American Republic").  The policies were previously reinsured by North America Life under a coinsurance agreement between World Insurance Company ("World Insurance") and North America Life that was entered into on July 22, 2009, which was subsequently commuted.  World Insurance was subsequently purchased by and merged into American Republic.  The current coinsurance agreement is now between Security National Life and American Republic and became effective on January 1, 2015.  As part of the coinsurance agreement, American Republic transferred all contractual obligations and risks to Security National Life and Security National Life took control of $15,004,771 of assets in a trust account held by Texas Capital Bank as the trustee. The assets have subsequently been moved to a trust account held by Zions Bank as the trustee.

Real Estate Development

The Company is capitalizing on the opportunity to develop commercial assets on its existing properties. The cost to acquire existing for-sale assets currently exceeds the replacement costs, thus creating the opportunity for development and redevelopment of the land the company currently owns. The Company has developed, or is in the process of developing assets that have an initial development cost exceeding $100,000,000.  The group plans to continue its development endeavors as the market demands.
7


Dry Creek at East Village Apartments

The construction of Dry Creek at East Village Apartments ("Dry Creek") was completed in December 2015.  The total project consists of 282 units and contains a mixture of one, two and three bedroom units.  It is located within close proximity to a transit hub and as of December 31, 2016, was 94% occupied.  Rental rates increased in the market by 9.8% over pro forma rents, and effective (achieved) rates net of concessions also increased.  Leasing remains strong and vacancy rates in the market remain below the long-term average.

As Dry Creek has matured in its leasing and operations, the management group has pushed to retain tenants and increase the resident experience. This optimism has seen great acceptance as Dry Creek continues to maintain longer term residents and management offers a Class A living experience in the suburban market of Salt Lake City. The Company continues to view Dry Creek as a long-term investment with strong upside potential in a growing market.

53rd Center Development

In 2015 the Company broke ground and commenced development on the first phase of its new corporate campus.  The anticipated project, comprising nearly 20 acres of land that is currently owned by the Company in the central valley of Salt Lake City, is envisioned to be a multi-year, phased development. At full development, the project will include nearly one million square-feet in six buildings, ranging from four to ten stories, and will be serviced by three parking structures with about 4,000 stalls.

The first phase of the project includes a building and a parking garage consisting of nearly 200,000 square feet of office and retail space with 748 parking stalls. This phase of the campus is expected to be completed in the third quarter of 2017.

Regulation

The Company's insurance subsidiaries are subject to comprehensive regulation in the jurisdictions in which they do business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding aggregate reserves for life policies and annuity contracts, policy claims, unearned premiums, and other matters. The Company's insurance subsidiaries are subject to this type of regulation in any state in which they are licensed to do business. Such regulation could involve additional costs, restrict operations or delay implementation of the Company's business plans.

The Company's life insurance subsidiaries are currently subject to regulation in Utah, Arkansas, Louisiana, Mississippi and Texas under insurance holding company legislation, and other states where applicable. Generally, intercompany transfers of assets and dividend payments from insurance subsidiaries are subject to prior notice of approval from the state insurance department, if they are deemed "extraordinary" under these statutes. The insurance subsidiaries are required, under state insurance laws, to file detailed annual reports with the supervisory agencies in each of the states in which they do business. Their business and accounts are also subject to examination by these agencies. The Texas Department of Banking also audits pre-need insurance policies that are issued in the state of Texas.  Pre-need policies are life and annuity products sold as the funding mechanism for funeral plans through funeral homes by Security National agents.  The Company is required to send the Texas Department of Banking an annual report that summarizes the number of policies in force and the face amount or death benefit for each policy.  This annual report also indicates the number of new policies issued for that year, all death claims paid that year, and all premiums received.

The Company's cemetery and mortuary subsidiaries are subject to the Federal Trade Commission's comprehensive funeral industry rules and to state regulations in the various states where such operations are domiciled. The morticians must be licensed by the respective state in which they provide their services. Similarly, the mortuaries and cemeteries are governed and licensed by state statutes and city ordinances in Utah and California. Reports are required to be kept on file on a yearly basis which include financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually on the basis of such reports. The cemeteries maintain city or county licenses where they conduct business.

The Company's mortgage subsidiaries are subject to the rules and regulations of the U.S. Department of Housing and Urban Development (HUD), and to various state licensing acts and regulations and the Consumer Financial Protection Bureau (CFPB). These regulations, among other things, specify minimum capital requirements, procedures for loan origination and underwriting, licensing of brokers and loan officers, quality review audits and the fees that can be charged to borrowers. Each year, the Company is required to have an audit completed for each mortgage subsidiary by an independent registered public accounting firm to verify compliance under some of these regulations. In addition to the government regulations, the Company must meet loan requirements, and underwriting guidelines of various investors who purchase the loans.

8

Income Taxes

The Company's insurance subsidiaries, Security National Life and First Guaranty, are taxed under the Life Insurance Company Tax Act of 1984. Under the act, life insurance companies are taxed at standard corporate rates on life insurance company taxable income. Life insurance company taxable income is gross income less general business deductions, reserves for future policyholder benefits (with modifications), and a small life insurance company deduction (up to 60% of life insurance company taxable income). The Company may be subject to the corporate Alternative Minimum Tax (AMT). Also, under the Tax Reform Act of 1986, distributions in excess of stockholders' surplus account or a significant decrease in life reserves will result in taxable income.

Security National Life and First Guaranty calculate their life insurance taxable income after establishing a provision representing a portion of the costs of acquisition of such life insurance business. The effect of the provision is that a certain percentage of the Company's premium income is characterized as deferred expenses and recognized over a five or ten-year period.

The Company's non‑life insurance company subsidiaries are taxed in general under the regular corporate tax provisions. The following subsidiaries are regulated as life insurance companies but do not meet the Internal Revenue Code definition of a life insurance company so are taxed as insurance companies other than life insurance companies: Memorial Insurance, Southern Security and Trans-Western.

Competition

The life insurance industry is highly competitive. There are approximately 2,000 legal reserve life insurance companies in business in the United States. These insurance companies differentiate themselves through marketing techniques, product features, price and customer service. The Company's insurance subsidiaries compete with a large number of insurance companies, many of which have greater financial resources, a longer business history, and more diversified line of insurance products than the Company. In addition, such companies generally have a larger sales force. Further, the Company competes with mutual insurance companies which may have a competitive advantage because all profits accrue to policyholders. Because the Company is smaller by industry standards and lacks broad diversification of risk, it may be more vulnerable to losses than larger, better-established companies. The Company believes that its policies and rates for the markets it serves are generally competitive.

The cemetery and mortuary industry is also highly competitive. In the Utah and California markets where the Company competes, there are a number of cemeteries and mortuaries which have longer business histories, more established positions in the community, and stronger financial positions than the Company. In addition, some of the cemeteries with which the Company must compete for sales are owned by municipalities and, as a result, can offer lower prices than can the Company. The Company bears the cost of a pre‑need sales program that is not incurred by those competitors which do not have a pre‑need sales force. The Company believes that its products and prices are generally competitive with those in the industry.

The mortgage industry is highly competitive with a large number of mortgage companies and banks in the same geographic area in which the Company is operating. The mortgage industry in general is sensitive to changes in interest rates and the refinancing market is particularly vulnerable to changes in interest rates.

Employees

As of December 31, 2016, the Company had 1,393 full-time and 264 part-time employees.
9

Item 2.  Properties

The following table sets forth the location of the Company's office facilities and certain other information relating to these properties.

Street
 
City
State
Function
Owned Leased
 
Approximate
Square
 Footage
   
Lease
Amount
 
Expiration
 
                                     
5300 S. 360 W.  
Salt Lake City
UT
Corporate Headquarters
Owned
   
36,000
               
N/A
 
5201 S. Green Street
 
Salt Lake City
UT
Mortgage Operations
Owned
   
36,899
               
N/A
 
1044 River Oaks Dr.
 
Flowood
MS
Insurance Operations
Owned
   
21,521
               
N/A
 
5239 Greenpine Dr.
 
Murray
UT
Funeral Service Operations
Owned
   
1,642
               
N/A
 
351 N. 3rd St.
 
Ashdown
AR
Insurance Operations
Leased
   
4,200
   
$
1,757
/
 
mo
 
7/12/2017
 
497-A Sutton Bridge Rd.
 
Rainbow City
AL
Fast Funding Operations
Leased
   
5,500
   
$
33,600
/
 
yr
 
6/30/2018
 
9700 Stirling Rd., Suite 110
 
Cooper City
FL
Fast Funding Operations
Leased
   
1,018
   
$
63,600
/
 
yr
 
month to month
 
3515 Pelham Rd., Suite 200
 
Greenville
SC
Fast Funding Operations
Leased
   
4,000
   
$
4,643
/
 
mo
 
5/31/2018
 
2567 Mall Rd.
 
Florence
AL
Mortgage Sales
Sub-Leased
   
1,600
   
$
750
/
 
mo
 
month to month
 
16427 North Scottsdale Road
 
Scottsdale
AZ
Mortgage Sales
Leased
   
3,966
   
$
10,246
/
 
mo
 
2/29/2020
 
17015 N. Scottsdale Rd., Suite 125
 
Scottsdale
AZ
Mortgage Sales
Leased
   
6,070
   
$
13,025
/
 
mo
 
3/31/2017
 
17015 N. Scottsdale Rd., Suite 210
 
Scottsdale
AZ
Mortgage Sales
Leased
   
2,906
   
$
6,054
/
 
mo
 
3/31/2017
 
17015 N. Scottsdale Rd., Suite 340
 
Scottsdale
AZ
Mortgage Sales
Leased
   
1,900
   
$
3,958
/
 
mo
 
1/31/2019
 
8600 East Anderson Drive, Suite 240
 
Scottsdale
AZ
Mortgage Sales
Leased
   
3,756
   
$
8,138
/
 
mo
 
10/31/2019
 
1819 S. Dobson
 
Mesa
AZ
Mortgage Sales
Leased
   
2,397
   
$
1,381
/
 
mo
 
4/30/2017
 
5701 Talavi Blvd. Suite 155
 
Glendale
AZ
Mortgage Sales
Leased
   
2,214
   
$
4,428
/
 
mo
 
month to month
 
6751 N. Sunset Blvd.
 
Glendale
AZ
Mortgage Sales
Leased
   
3,431
   
$
6,576
/
 
mo
 
6/30/2018
 
2450 S. Gilbert Rd.
 
Chandler
AZ
Mortgage Sales
Leased
   
6,306
   
$
10,247
/
 
mo
 
2/28/2019
 
3100 W. Ray Rd.
 
Chandler
AZ
Mortgage Sales
Leased
   
1,000
   
$
949
/
 
mo
 
month to month
 
3435 South Demaree
 
Visalia
CA
Mortgage Sales
Leased
   
1,740
   
$
2,175
/
 
mo
 
4/30/2019
 
2333 San Ramon Vallue Blvd.
 
San Ramon
CA
Mortgage Sales
Leased
   
1,563
   
$
3,908
/
 
mo
 
5/30/2019
 
923 East Valley Blvd.
 
San Gabriel
CA
Mortgage Sales
Leased
   
820
   
$
1,400
/
 
mo
 
8/31/2017
 
3005 Douglas Blvd., Suite 100
 
Roseville
CA
Mortgage Sales
Leased
   
3,722
   
$
7,406
/
 
mo
 
4/14/2018
 
140 Gregory Lane
 
Pleasant Hill
CA
Mortgage Sales
Leased
   
3,125
   
$
3,244
/
 
mo
 
1/31/2019
 
140 Lake Ave., Suite 305
 
Pasadena
CA
Mortgage Sales
Leased
   
1,105
   
$
3,244
/
 
mo
 
3/31/2017
 
765 The City Dr., Suite 360
 
Orange
CA
Mortgage Sales
Leased
   
3,886
   
$
8,451
/
 
mo
 
8/31/2017
 
18625 Suter Blvd., Suite 300
 
Morgan Hill
CA
Mortgage Sales
Leased
   
2,255
   
$
2,660
/
 
mo
 
6/30/2018
 
750 University Ave.
 
Los Gatos
CA
Mortgage Sales
Leased
   
2,137
   
$
9,018
/
 
mo
 
4/30/2018
 
3643 East 4th Street, Suite A
 
Long Beach
CA
Mortgage Sales
Leased
   
1,250
   
$
2,060
/
 
mo
 
10/31/2017
 
3908 Hathaway Ave.
 
Long Beach
CA
Mortgage Sales
Leased
   
200
   
$
100
/
 
mo
 
month to month
 
13191 Crossroads Parkway
 
City of Ind.
CA
Mortgage Sales
Leased
   
2,569
   
$
5,954
/
 
mo
 
7/31/2020
 
5650 El Camino Real
 
Carlsbad
CA
Mortgage Sales
Leased
   
1,739
   
$
2,956
/
 
mo
 
10/31/2017
 
7100 E. Bellview Ave., Suite 301
 
Greenwood Village
CO
Mortgage Sales
Leased
   
2,549
   
$
2,929
/
 
mo
 
month to month
 
8480 E. Orchard Rd.
 
Greenwood Village
CO
Mortgage Sales
Leased
   
4,631
   
$
9,647
/
 
mo
 
2/28/2018
 
1120 West 122nd Ave.
 
Denver
CO
Mortgage Sales
Leased
   
5,238
   
$
5,250
/
 
mo
 
10/31/2021
 
14502 N. Dale Mabry Highway
 
Tampa
FL
Mortgage Sales
Leased
   
250
   
$
550
/
 
mo
 
month to month
 
4023 Armenia Ave.
 
Tampa
FL
Mortgage Sales
Leased
   
1,563
   
$
1,865
/
 
mo
 
4/30/2019
 
35190 US Highway N.
 
Palm
FL
Mortgage Sales
Leased
   
1,982
   
$
2,945
/
 
mo
 
2/28/2018
 
17 N. Summerlin Ave.
 
Orlando
FL
Mortgage Sales
Leased
   
1,400
   
$
3,328
/
 
mo
 
11/30/2018
 
5222 Andrus Ave.
 
Orlando
FL
Mortgage Sales
Leased
   
1,450
   
$
1,716
/
 
mo
 
12/31/2017
 
7575 Dr. Phillips Blvd., Suite 270
 
Orlando
FL
Mortgage Sales
Leased
   
1,844
   
$
5,292
/
 
mo
 
3/31/2018
 
3689 Tampa Rd.
 
Oldsmar
FL
Mortgage Sales
Leased
   
5,620
   
$
6,720
/
 
mo
 
3/31/2018
 
4947 Tamiami Trail N.
 
Naples
FL
Mortgage Sales
Leased
   
1,168
   
$
1,303
/
 
mo
 
11/30/2018
 
4732 US Highway 98 North
 
Lakeland
FL
Mortgage Sales
Leased
   
1,250
   
$
1,070
/
 
mo
 
5/30/2017
 
1145 TownPark Ave., Suite 2215
 
Lake Mary
FL
Mortgage Sales
Leased
   
9,390
   
$
14,775
/
 
mo
 
3/1/2020
 
1525 International Parkway
 
Lake Mary
FL
Mortgage Sales
Leased
   
2,862
   
$
5,128
/
 
mo
 
10/31/2019
 
4575 Via Royal, Suite 100
 
Ft Myers
FL
Mortgage Sales
Sub-Leased
   
2,631
   
$
500
/
 
mo
 
month to month
 
2500 N. Military Trail
 
Boca Raton
FL
Mortgage Sales
Leased
   
2,453
   
$
4,500
/
 
mo
 
7/14/2017
 
3030 McEver Rd.
 
Gainsville
GA
Mortgage Sales
Leased
   
300
   
$
839
/
 
mo
 
month to month
 
2250 Satellite Blvd.
 
Duluth
GA
Mortgage Sales
Leased
   
1,380
   
$
1,553
/
 
mo
 
1/31/2017
 
4520 Kuhui St.
 
Kapaa
HI
Mortgage Sales
Leased
   
750
   
$
1,025
/
 
mo
 
month to month
 
12 W. Main St.
 
Rexburg
ID
Mortgage Sales
Leased
   
800
   
$
800
/
 
mo
 
9/30/2017
 
9042 W. Barnes Dr.
 
Boise
ID
Mortgage Sales
Leased
   
1,568
   
$
2,090
/
 
mo
 
10/31/2018
 
7227 West Madison St.
 
Forest Park
IL
Mortgage Sales
Leased
   
1,800
   
$
2,100
/
 
mo
 
6/30/2017
 
30700 Telegraph Rd.
 
Bingham Farms
MI
Mortgage Sales
Leased
   
1,099
   
$
1,374
/
 
mo
 
3/31/2019
 
108 Sikes Place
 
Charlotte
NC
Mortgage Sales
Leased
   
275
   
$
875
/
 
mo
 
2/28/2017
 
10765 Double R Blvd.
 
Reno
NV
Mortgage Sales
Leased
   
4,214
   
$
8,639
/
 
mo
 
10/31/2021
 
1980 Festival Plaza Dr.
 
Las Vegas
NV
Mortgage Sales
Leased
   
12,866
   
$
39,884
/
 
mo
 
5/31/2021
 
4000 S. Eastern Ave., Suite 310
 
Las Vegas
NV
Mortgage Sales
Leased
   
2,750
   
$
54,450
/
 
yr
 
1/31/2020
 
6130 Elton Ave., Suite 223
 
Las Vegas
NV
Mortgage Sales
Leased
   
125
   
$
400
/
 
mo
 
month to month
 
9330 W. Sahara Ave., Suite 270
 
Las Vegas
NV
Mortgage Sales
Leased
   
2,681
   
$
4,101
/
 
mo
 
8/31/2018
 
2370 Corporate Circle, Suite 200
 
Henderson
NV
Mortgage Sales
Leased
   
10,261
   
$
184,855
/
 
yr
 
4/30/2020
 
1160 State Route 28
 
Millford
OH
Mortgage Sales
Leased
   
300
   
$
550
/
 
mo
 
month to month
 
999 Polaris Parkway
 
Columbus
OH
Mortgage Sales
Leased
   
1,751
   
$
1,642
/
 
mo
 
7/31/2018
 
11305 Reed Hartman Highway
 
Blue Ash
OH
Mortgage Sales
Leased
   
711
   
$
918
/
 
mo
 
5/31/2019
 
2468 W. New Orleans
 
Broken Arrow
OK
Mortgage Sales
Leased
   
1,683
   
$
1,896
/
 
mo
 
12/31/2019
 
10610 SE Washington
 
Portland
OR
Mortgage Sales
Leased
   
506
   
$
1,000
/
 
mo
 
month to month
 
3311 NE MLK Jr Blvd., Suite 203
 
Portland
OR
Mortgage Sales
Leased
   
1,400
   
$
675
/
 
mo
 
month to month
 
10365 SE Sunnyside Rd.
 
Clackamus
OR
Mortgage Sales
Leased
   
1,288
   
$
2,280
/
 
mo
 
11/30/2019
 
1063 E. Montague Ave.
 
Charleston
SC
Mortgage Sales
Leased
   
2,334
   
$
3,404
/
 
mo
 
8/31/2020
 
6263 Poplar Ave.
 
Memphis
TN
Mortgage Sales
Leased
   
1,680
   
$
2,380
/
 
mo
 
3/31/2019
 
 
 
10

Item 2.  Properties (Continued)
 
Street
 
City
State
Function
Owned Leased
 
Approximate
Square
Footage
   
Lease
Amount
 
Expiration
 
108 Stekola Ln.
 
Knoxville
TN
Mortgage Sales
Leased
   
1,100
   
$
1,200
/
 
 mo
 
7/31/2018
 
6640 Carothers Parkway
 
Franklin
TN
Mortgage Sales
Leased
   
3,229
   
$
3,902
/
 
 mo
 
3/31/2020
 
303 Germantown Bend Cove
 
Cordova
TN
Mortgage Sales
Leased
   
1,200
   
$
1,500
/
 
 mo
 
3/31/2017
 
8505 Technology Forest Place, Suite 304
 
Woodlands
TX
Mortgage Sales
Leased
   
1,250
   
$
2,900
/
 
 mo
 
5/31/2018
 
602 S Main Street, Suite 300
 
Weatherford
TX
Mortgage Sales
Sub-Leased
   
1,000
   
$
1,200
/
 
 mo
 
5/31/2017
 
52 Sugar Creek Center Blvd., Suite 150
 
Sugarland
TX
Mortgage Sales
Leased
   
1,788
   
$
3,497
/
 
 mo
 
3/31/2020
 
2526 N. Loop 1604 W., Suite 210
 
San Antonio
TX
Mortgage Sales
Leased
   
4,959
   
$
10,125
/
 
 mo
 
11/30/2019
 
1 Chisholm Trail Rd., Suite 210
 
Round Rock
TX
Mortgage Sales
Leased
   
3,402
   
$
3,331
/
 
 mo
 
12/31/2017
 
3027 Marina Bay Dr.
 
League City
TX
Mortgage Sales
Leased
   
2,450
   
$
2,016
/
 
 mo
 
3/31/2020
 
3027 Marina Bay Dr., Suite 110
 
League City
TX
Mortgage Sales
Leased
   
180
   
$
740
/
 
 mo
 
3/31/2020
 
120 West Village
 
Laredo
TX
Mortgage Sales
Leased
   
800
   
$
1,136
/
 
 mo
 
4/30/2018
 
7913 McPherson, Suite B
 
Laredo
TX
Mortgage Sales
Leased
   
1,200
   
$
1,400
/
 
 mo
 
month to month
 
1202 Lakeway Dr., Suite 12
 
Lakeway
TX
Mortgage Sales
Leased
   
1,192
   
$
2,145
/
 
 mo
 
3/31/2018
 
24668 Kingsland Blvd.
 
Katy
TX
Mortgage Sales
Leased
   
150
   
$
400
/
 
 mo
 
month to month
 
2877 Commercial Center Blvd.
 
Katy
TX
Mortgage Sales
Leased
   
250
   
$
2,000
/
 
 mo
 
month to month
 
1848 Norwood Plaza, Suite 205
 
Hurst
TX
Mortgage Sales
Sub-Leased
   
455
   
$
361
/
 
 mo
 
month to month
 
16350 Park Ten Place
 
Houston
TX
Mortgage Sales
Leased
   
3,397
   
$
7,077
/
 
 mo
 
11/30/2018
 
17347 Village Green Dr., Suite 102A
 
Houston
TX
Mortgage Sales
Sub-Leased
   
3,000
   
$
8,970
/
 
 mo
 
month to month
 
30417 5th St., Suite B
 
Fulshear
TX
Mortgage Sales
Sub-Leased
   
1,000
   
$
550
/
 
 mo
 
month to month
 
4936 Collinwood, Suite 110
 
Fort Worth
TX
Mortgage Sales
Leased
   
1,900
   
$
34,200
/
 
 yr
 
month to month
 
4100 Alpha Rd.
 
Farmers Branch
TX
Mortgage Sales
Leased
   
2,935
   
$
4,035
/
 
 mo
 
3/31/2020
 
1626 Lee Trevino
 
El Paso
TX
Mortgage Sales
Leased
   
8,400
   
$
7,059
   
     mo
 
11/30/2019
 
921 West New Hope Drive
 
Cedar Park
TX
Mortgage Sales
Subleased
   
880
   
$
1,000
/
 
 mo
 
7/31/2017
 
8700 Manchaca Rd., Suite 603
 
Austin
TX
Mortgage Sales
Sub-Leased
   
850
   
$
1,600
/
 
 mo
 
7/31/2019
 
9737 Great Hills Trail, Suite 150
 
Austin
TX
Mortgage Sales
Leased
   
11,717
   
$
15,378
/
 
 mo
 
8/31/2024
 
16801 Addison Rd.
 
Addison
TX
Mortgage Sales
Leased
   
4,662
   
$
3,011
/
 
 mo
 
2/14/2018
 
118 E. Vine St.
 
Tooele
UT
Mortgage Sales
Leased
   
1,000
   
$
849
/
 
 mo
 
7/31/2017
 
5965 So. Redwood Rd.
 
Taylorsville
UT
Mortgage Sales
Leased
   
2,000
   
$
600
/
 
 mo
 
12/31/2017
 
6575 S. Redwood Rd.
 
Taylorsville
UT
Mortgage Sales
Leased
   
3,323
   
$
4,638
/
 
 mo
 
8/31/2019
 
10437 S. 1300 W.
 
South Jordan
UT
Mortgage Sales
Leased
   
4,000
   
$
7,800
/
 
 mo
 
9/30/2019
 
126 West Sego Lily Dr.
 
Sandy
UT
Mortgage Sales
Leased
   
2,794
   
$
5,451
/
 
 mo
 
8/31/2017
 
9815 S. Monroe St.
 
Sandy
UT
Mortgage Sales
Leased
   
1,725
   
$
3,306
/
 
 mo
 
9/30/2018
 
9815 S. Monroe St., Suite 206
 
Sandy
UT
Mortgage Sales
Leased
   
2,819
   
$
5,286
/
 
 mo
 
5/31/2018
 
9980 S. 300 W., Suite 201
 
Sandy
UT
Mortgage Sales
Leased
   
100
   
$
1,819
/
 
 mo
 
month to month
 
1111 Brickyard Rd.
 
Salt Lake City
UT
Mortgage Sales
Leased
   
4,857
   
$
3,917
/
 
 mo
 
1/31/2018
 
5993 S. Redwood Rd.
 
Salt Lake City
UT
Mortgage Sales
Leased
   
2,880
   
$
2,375
/
 
 mo
 
7/31/2021
 
1224 S. River Rd., Suites E3 & E4
 
Saint George
UT
Mortgage Sales
Leased
   
1,900
   
$
1,814
/
 
 mo
 
4/30/2018
 
465 N. Main
 
Richfield
UT
Mortgage Sales
Leased
   
2,848
   
$
1,600
/
 
 mo
 
month to month
 
1245 Deer Valley Dr., Suite 3A
 
Park City
UT
Mortgage Sales
Leased
   
2,183
   
$
4,684
/
 
 mo
 
12/31/2017
 
730 South Sleepy Ridge Dr.
 
Orem
UT
Mortgage Sales
Leased
   
891
   
$
1,500
/
 
 mo
 
10/31/2017
 
5201 S. Green St.
 
Murray
UT
Mortgage Sales
Leased
   
10,990
   
$
13,456
/
 
 mo
 
6/30/2017
 
210 E. Main St.
 
Midway
UT
Mortgage Sales
Leased
   
1,600
   
$
1,850
/
 
 mo
 
12/31/2018
 
6965 S. Union Park,
Stes 100, 260, 300, 460, 470, & 480
 
Midvale
UT
Mortgage Sales
Leased
   
37,226
   
$
74,098
/
 
 mo
 
2/28/2018
 
6975 Union Park Ave., Suite 420
 
Midvale
UT
Mortgage Sales
Leased
   
6,672
   
$
12,500
/
 
 mo
 
6/30/2019
 
1133 North Main St.
 
Layton
UT
Mortgage Sales
Subleased
   
300
   
$
500
/
 
 mo
 
month to month
 
288 SR 248, Suite 2A
 
Kamas
UT
Mortgage Sales
Leased
   
1,480
   
$
2,350
/
 
 mo
 
month to month
 
497 S. Main
 
Ephraim
UT
Mortgage Sales
Leased
   
953
   
$
765
/
 
 mo
 
9/30/2017
 
15640 NE Fourth Plain Blvd., Suite 220
 
Vancouver
WA
Mortgage Sales
Leased
   
360
   
$
1,190
/
 
 mo
 
6/30/2017
 
535 Dock St., Suite 100
 
Tacoma
WA
Mortgage Sales
Leased
   
3,825
   
$
5,620
/
 
 mo
 
7/31/2018
 
 
318 39th St. Ave. SW, Suite A
Puyallup
WA
Mortgage Sales
Leased
   
3,431
   
$
5,575
 
/
mo
11/30/2017
11232 120th Ave. NE, Suite 206
Kirkland
WA
Mortgage Sales
Leased
   
500
   
$
350
 
/
mo
5/31/2017
11314 4th Ave. W.
Everett
WA
Mortgage Sales
Leased
   
1,793
   
$
2,308
 
/
mo
10/31/2018
1604 Hewitt Ave., Suite 703
Everett
WA
Mortgage Sales
Leased
   
2,038
   
$
4,650
 
/
mo
month to month
5002 7th Ave.
Kenosha
WI
Mortgage Sales
Leased
   
1,450
   
$
1,200
 
/
mo
10/31/2019
 
The Company believes the office facilities it occupies are in good operating condition and adequate for current operations.   The company will enter into additional leases or modify existing leases to meet market demand.  Those leases will be month to month where possible.  As leases expire the Company will either renew or find comparable leases or acquire additional office space.
11

Item 2.  Properties (Continued)

The following table summarizes the location and acreage of the six Company owned cemeteries, each of which includes one or more mausoleums:

             
Net Saleable Acreage
 
Name of Cemetery
Location
Date Acquired
 
Developed
Acreage (1)
   
Total
 Acreage (1)
   
Acres
Sold as
 Cemetery
 Spaces (2)
   
Total Available Acreage (1)
 
Memorial Estates, Inc.
                         
Lakeview Cemetery
1640 East Lakeview Drive
Bountiful, Utah
1973
   
7
     
40
     
6
     
34
 
                                     
Mountain View Cemetery
3115 East 7800 South
Salt Lake City, Utah
1973
   
17
     
54
     
16
     
38
 
                                     
Redwood Cemetery (4)
6500 South Redwood Road
West Jordan, Utah
1973
   
34
     
78
     
30
     
48
 
                                     
Deseret Memorial Inc.
                                 
Lake Hills Cemetery (3)
10055 South State Street
Sandy, Utah
1991
   
9
     
28
     
4
     
24
 
                                     
Holladay Memorial Park, Inc.
                                 
Holladay Memorial Park (3)(4)
4900 South Memory Lane
Holladay, Utah
1991
   
5
     
14
     
4
     
10
 
                                     
California Memorial Estates, Inc.
                                 
Singing Hills Memorial Park
2800 Dehesa Road
El Cajon, California
1995
   
8
     
35
     
4
     
31
 

______________

 
(1)
The acreage represents estimates of acres that are based upon survey reports, title reports, appraisal reports or the Company's inspection of the cemeteries.
 
(2)
Includes spaces sold for cash and installment contract sales.
 
(3)
As of December 31, 2016, there were mortgages of approximately $147,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, and Lake Hills Cemetery.
 
(4)
These cemeteries include two granite mausoleums.

12

Item 2. Properties (Continued)

The following table summarizes the location, square footage and the number of viewing rooms and chapels of the seven Company owned mortuaries:

  Date   Viewing           Square  
Name of Mortuary
Location
Acquired
 
Room(s)
   
Chapel(s)
   
Footage
 
                       
Memorial Mortuary, Inc.
                     
Memorial Mortuary
5850 South 900 East
                   
Murray, Utah
1973
   
3
     
1
     
20,000
 
                             
Affordable Funerals and
  Cremations, St. George
157 East Riverside Dr., No. 3A
2016
   
1
     
1
     
2,360
 
St. George, Utah
                         
                             
Memorial Estates, Inc.
                           
Redwood Mortuary(2)
6500 South Redwood Rd.
                         
West Jordan, Utah
1973
   
2
     
1
     
10,000
 
                             
Mountain View Mortuary(2)
3115 East 7800 South
                         
Salt Lake City, Utah
1973
   
2
     
1
     
16,000
 
                             
Lakeview Mortuary(2)
1640 East Lakeview Dr.
                         
Bountiful, Utah
1973
   
0
     
1
     
5,500
 
                             
Deseret Memorial, Inc.
                           
Deseret Mortuary(1)
36 East 700 South
                         
Salt Lake City, Utah
1991
   
2
     
2
     
36,300
 
                             
Lakehills Mortuary(2)
10055 South State St.
                         
Sandy, Utah
1991
   
2
     
1
     
18,000
 
                             
Cottonwood Mortuary, Inc.
                           
Cottonwood Mortuary(1)(2)
4670 South Highland Dr.
                         
Holladay, Utah
1991
   
2
     
1
     
14,500
 
 
_____________

(1)
As of December 31, 2016, there were mortgages of approximately $147,000 collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park and Lake Hills Cemetery.
(2)
These funeral homes also provide burial niches at their respective locations.

Item 3.  Legal Proceedings

Lehman Brothers and Aurora Loan Services Litigation - Utah

On April 15, 2005, SecurityNational Mortgage entered into a Loan Purchase Agreement with Lehman Brothers Bank, FSB ("Lehman Bank") which agreement incorporated a Seller's Guide.  Pursuant to the Loan Purchase Agreement, Lehman Bank purchased mortgage loans from time to time from SecurityNational Mortgage.  Lehman Bank asserted that certain of the mortgage loans that it purchased from SecurityNational Mortgage contained alleged misrepresentations and early payment defaults.  As a result, Lehman Bank contended it had the right to require SecurityNational Mortgage to repurchase certain loans or be liable for losses related to such Loans under the Loan Purchase Agreement. SecurityNational Mortgage disagreed with these claims.

On December 17, 2007, SecurityNational Mortgage entered into an Indemnification Agreement with Lehman Bank and Aurora Loan Services LLC ("Aurora").  Under the terms of the Indemnification Agreement, SecurityNational Mortgage agreed to indemnify Lehman Bank and Aurora for certain amounts of actual losses, as defined, that Lehman Bank and Aurora may incur on account of the alleged breaches and early payment defaults pertaining to certain identified loans. A reserve account was set up to cover said losses.  From the time the reserve account was established, approximately $4,300,000 was taken from the reserve account to indemnify Lehman Bank and Aurora for alleged losses.  On March 28, 2011, Aurora Bank FSB (formerly known as Lehman Brothers Bank, FSB) ("Aurora Bank") and Aurora allegedly assigned certain rights and remedies under the Indemnification Agreement to Lehman Brothers Holdings, Inc. ("Lehman Holdings").
13


On May 11, 2011, SecurityNational Mortgage filed a complaint against Aurora Bank and Aurora in the United States District Court, Utah, which was assigned to Judge David Nuffer.  The allegations in the complaint included breach of the Indemnification Agreement.  SecurityNational Mortgage claimed it was entitled to a judgment of approximately $4,000,000 against Aurora Bank, as well as Aurora to the extent of its involvement, for payments which should not have been taken from the reserve account.

On June 8, 2011, Lehman Holdings, which had filed for bankruptcy in September 2008, filed a complaint in the United States District Court, Utah against SecurityNational Mortgage. The case was assigned to Judge Ted Stewart. The complaint alleged claims for damages for breach of contract and breach of warranty pursuant to the Loan Purchase Agreement, as well as alleged early payment default loans, and initially claimed damages in excess of $5,000,000.  Lehman Holdings further alleged that Aurora Bank sold mortgage loans to it and assigned contractual rights and remedies.  SecurityNational Mortgage strongly disagreed with the claims in Lehman Holdings' complaint.

On November 29, 2016, Judge Nuffer entered a judgment in favor of SecurityNational Mortgage Company, jointly and severally against Aurora Commercial Corporation (successor by merger to Aurora Bank), Aurora Bank and Aurora. The amount of the judgment was $3,892,974 principal, plus interest through May 31, 2014 in the amount of $1,674,240, plus interest for each day after May 31, 2014 until judgment (dated November 29, 2016) at the rate of $960 per diem.

In December 2016, the cases before Judge Nuffer and Judge Stewart were settled. Final settlement agreements were executed on December 20, 2016, which were effective as of December 9, 2016. Under the terms of the settlement, payments were made by Aurora Commercial to SecurityNational Mortgage, and by SecurityNational Mortgage to Lehman Holdings. The net result of the settlement involving both of the Utah cases was that $2,125,000 more was paid to Lehman Holdings. Additionally, the release agreed to by the parties covered claims arising from the sale of mortgage loans by SecurityNational Mortgage to Aurora Bank or Lehman Holdings that were included in the Utah cases.

Lehman Brothers Litigation – Delaware and New York

In January 2014, Lehman Holdings entered into a settlement with the Federal National Mortgage Association (Fannie Mae) concerning the mortgage loan claims asserted by Fannie Mae against Lehman Holdings that were based on alleged breaches of certain representations and warranties by Lehman Holdings.  Lehman Holdings had acquired these loans from Aurora Bank, which in turn purchased the loans from residential mortgage loan originators, including SecurityNational Mortgage.  A settlement based on similar circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014.

Lehman Holdings filed a motion in May 2014 with the U.S. Bankruptcy Court of the Southern District of New York to require the mortgage loan originators, including SecurityNational Mortgage, to engage in non-binding mediations of its alleged indemnification claims against the mortgage loan originators relative to the Fannie Mae and Freddie Mac settlements with Lehman Holdings.  The mediation was not successful in resolving any issues between SecurityNational Mortgage and Lehman Holdings.

On January 26, 2016, SecurityNational Mortgage filed a declaratory judgment action against Lehman Holdings in the Superior Court for the State of Delaware.  In the Delaware action, SecurityNational Mortgage asserted its right to obtain a declaration of rights in that there are allegedly millions of dollars in dispute with Lehman Holdings pertaining to approximately 136 loans.  SecurityNational Mortgage sought declaratory judgment as to its rights as it contends that it has no liability to Lehman Holdings as a result of Lehman Holdings' settlements with Fannie Mae and Freddie Mac.  Lehman Holdings filed a motion in the Delaware court seeking to stay or dismiss the declaratory judgment action.  On August 24, 2016, the Court ruled that it would exercise its discretion to decline jurisdiction over the action and granted Lehman Holdings' motion to dismiss.

On February 3, 2016, Lehman Holdings filed an adversary proceeding against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S. Bankruptcy Court of the Southern District of New York seeking a declaration of rights similar in nature to the declaration that SecurityNational Mortgage sought in its Delaware lawsuit, and for damages relating to the defendants' obligations under indemnification provisions of the alleged agreements, in amounts to be determined at trial, including interest, attorneys' fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants.  A Case Management Order ("CMO") was entered on November 1, 2016.  On December 27, 2016, pursuant to the CMO, Lehman Holdings filed a Second Amended Complaint against SecurityNational Mortgage.  The case is presently in a motion period and no Answer is required to be filed by SecurityNational Mortgage pending further order of the Court.  SecurityNational Mortgage denies that it has any liability to Lehman Holdings and intends to vigorously protect and defend such position.

The Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings, which if adversely determined, would have a material adverse effect on its financial condition or results of operation.
14


Item 4.  Mine Safety Disclosures

Not applicable.

PART II

Item 5.  Market for the Registrant's Common Stock, Related Security Holder Matters, and Issuer Purchases of Equity Securities

The Company's Class A common stock trades on The NASDAQ National Market under the symbol "SNFCA." As of March 27, 2017, the closing sales price of the Class A common stock was $7.00 per share. The following were the high and low market closing sales prices for the Class A common stock by quarter as reported by NASDAQ since January 1, 2015:

   
Price Range (1)
 
   
High
   
Low
 
Period (Calendar Year)
           
             
2015
           
First Quarter
 
$
5.66
   
$
4.82
 
Second Quarter
 
$
6.34
   
$
4.75
 
Third Quarter
 
$
7.38
   
$
5.90
 
Fourth Quarter
 
$
6.20
   
$
5.34
 
                 
2016
               
First Quarter
 
$
6.17
   
$
4.85
 
Second Quarter
 
$
4.88
   
$
4.23
 
Third Quarter
 
$
5.62
   
$
4.59
 
Fourth Quarter
 
$
7.04
   
$
5.45
 
                 
2017
               
First Quarter (through March 27, 2017)
 
$
7.30
   
$
6.24
 

_____________

 (1)
 Sales prices have been adjusted retroactively for the effect of annual stock dividends.

The Class C common stock is not registered or traded on a national exchange. See Note 11 of the Notes to Consolidated Financial Statements.

The Company has never paid a cash dividend on its Class A or Class C common stock. The Company currently anticipates that all of its earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Class A or Class C common stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate. A 5% stock dividend on Class A and Class C common stock has been paid each year from 1990 through 2016.

The graph below compares the cumulative total stockholder return of the Company's Class A common stock with the cumulative total return on the Standard & Poor's 500 Stock Index and the Standard & Poor's Insurance Index for the period from December 31, 2011 through December 31, 2016. The graph assumes that the value of the investment in the Company's Class A common stock and in each of the indexes was $100 at December 31, 2011 and that all dividends were reinvested.

15

The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of the Company's Class A common stock.
 

 
 
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
SNFC
100
564
325
408
487
507
S & P 500
100
113
147
164
163
178
S & P Insurance
100
117
170
180
181
208
 
The stock performance graph set forth above is required by the Securities and Exchange Commission and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such acts.

As of December 31, 2016, there were 3,424 record holders of Class A common stock and 72 record holders of Class C common stock.
16


Item 6.  Selected Financial Data - The Company and Subsidiaries (Consolidated)

The following selected financial data is for each of the five years ended December 31, 2016, and is derived from the audited consolidated financial statements. The data as of December 31, 2016 and 2015, and for the three years ended December 31, 2016, should be read in conjunction with the consolidated financial statements, related notes and other financial information, specifically Note 21, "Immaterial Error Corrections".

Consolidated Statement of Earnings Data:

   
Year Ended December 31
 
   
2016(3)
   
2015(2)
   
2014
   
2013
   
2012(1)
 
Revenue
                             
Insurance premiums and other considerations
 
$
64,501,000
   
$
56,410,000
   
$
53,009,000
   
$
50,472,000
   
$
48,216,000
 
Net investment income
   
37,582,000
     
34,008,000
     
28,304,000
     
20,354,000
     
21,916,000
 
Net mortuary and cemetery sales
   
12,267,000
     
11,502,000
     
11,426,000
     
12,000,000
     
10,865,000
 
Realized gains on investments and other assets
   
(176,000
)
   
2,401,000
     
1,918,000
     
1,418,000
     
1,425,000
 
Other than temporary impairments
   
(270,000
)
   
(605,000
)
   
(164,000
)
   
(336,000
)
   
(1,208,000
)
Mortgage fee income
   
186,416,000
     
175,726,000
     
129,139,000
     
127,327,000
     
153,154,000
 
Other
   
6,888,000
     
5,122,000
     
3,747,000
     
2,606,000
     
1,159,000
 
Total revenues
   
307,208,000
     
284,564,000
     
227,379,000
     
213,841,000
     
235,527,000
 
                                         
Expenses
                                       
Policyholder benefits
   
54,864,000
     
50,762,000
     
47,850,000
     
48,130,000
     
45,681,000
 
                                       
Amortization of deferred policy acquisition costs
   
8,003,000
     
5,641,000
     
6,893,000
     
5,182,000
     
5,450,000
 
Selling, general and administrative expenses
   
216,702,000
     
200,674,000
     
154,866,000
     
147,406,000
     
156,310,000
 
Interest expense
   
5,112,000
     
4,459,000
     
2,994,000
     
2,854,000
     
3,744,000
 
                                       
Cost of goods and services of the mortuaries and cemeteries
   
1,787,000
     
1,803,000
     
1,853,000
     
1,919,000
     
1,724,000
 
Total benefits and expenses
   
286,468,000
     
263,339,000
     
214,456,000
     
205,491,000
     
212,909,000
 
Earnings before income taxes
   
20,740,000
     
21,225,000
     
12,923,000
     
8,350,000
     
22,618,000
 
Income tax expense
   
(6,461,000
)
   
(7,746,000
)
   
(4,899,000
)
   
(1,811,000
)
   
(5,070,000
)
Net earnings
 
$
14,279,000
   
$
13,479,000
   
$
8,024,000
   
$
6,539,000
   
$
17,548,000
 
                                         
Net earnings per common share (4)
 
$
0.96
   
$
0.93
   
$
0.58
   
$
0.48
   
$
1.37
 
Weighted average outstanding common shares (4)
   
14,806,000
     
14,439,000
     
13,893,000
     
13,740,000
     
12,802,000
 
Net earnings per common share-assuming dilution (4)
 
$
0.94
   
$
0.90
   
$
0.56
   
$
0.45
   
$
1.30
 
Weighted average outstanding common shares-assuming dilution (4)
   
15,127,000
     
14,952,000
     
14,343,000
     
14,419,000
     
13,462,000
 

17

Balance Sheet Data:
 
   
December 31
                         
   
2016(3)
   
2015(2)
   
2014
   
2013
   
2012(1)
 
Assets
                             
Investments and restricted assets
 
$
571,762,000
   
$
449,801,000
   
$
446,249,000
   
$
391,523,000
   
$
356,446,000
 
Cash
   
38,988,000
     
40,053,000
     
30,855,000
     
38,203,000
     
33,494,000
 
Receivables
   
101,361,000
     
131,313,000
     
82,079,000
     
88,832,000
     
111,157,000
 
Other assets
   
141,894,000
     
128,766,000
     
111,887,000
     
100,199,000
     
96,120,000
 
Total assets
 
$
854,005,000
   
$
749,933,000
   
$
671,070,000
   
$
618,757,000
   
$
597,217,000
 
                                         
Liabilities
                                       
Policyholder benefits
 
$
590,080,000
   
$
521,915,000
   
$
481,689,000
   
$
457,304,000
   
$
443,388,000
 
Bank & other loans payable
   
53,719,000
     
40,909,000
     
29,020,000
     
18,289,000
     
11,910,000
 
Cemetery & mortuary liabilities
   
12,360,000
     
12,816,000
     
13,242,000
     
13,176,000
     
13,412,000
 
Cemetery perpetual care obligation
   
3,598,000
     
3,466,000
     
3,407,000
     
3,266,000
     
3,153,000
 
Other liabilities
   
66,068,000
     
59,581,000
     
46,621,000
     
38,971,000
     
45,542,000
 
Total liabilities
   
725,825,000
     
638,687,000
     
573,979,000
     
531,006,000
     
517,405,000
 
                                         
Stockholders' equity
   
128,180,000
     
111,246,000
     
97,091,000
     
87,751,000
     
79,812,000
 
                                       
Total liabilities and stockholders' equity
 
$
854,005,000
   
$
749,933,000
   
$
671,070,000
   
$
618,757,000
   
$
597,217,000
 
                                         
 __________________                                        
(1) Includes the coinsurance with Mothe Life Insurance Company and DLE Life Insurance Company.
                 
(2) Includes the coinsurance with American Republic Life Insurance Company.
                         
(3) Includes the acquistion of First Guaranty Insurance Company.
                         
(4) Earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.
         

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company's operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to "niche" insurance products, such as the Company's funeral plan policies and traditional whole life products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on relatively low interest rates by originating mortgage loans.

Insurance Operations

The following table shows the condensed financial results for the Company's insurance operations for the years ended December 31, 2016, 2015 and 2014.  See Note 14 of the Notes to Consolidated Financial Statements.

   
Years ended December 31
(in thousands of dollars)
 
   
2016
   
2015
   
2016 vs 2015 % Increase
 (Decrease)
   
2014
   
2015 vs 2014 % Increase
 (Decrease)
 
Revenues from external customers
                             
Insurance premiums
 
$
64,501
   
$
56,410
     
14
%
 
$
53,009
     
6
%
Net investment income
   
28,618
     
25,297
     
13
%
   
23,008
     
10
%
Revenues from loan originations
   
2,401
     
2,474
     
(3
%)
   
4,029
     
(39
%)
Other
   
85
     
2,744
     
(97
%)
   
1,727
     
59
%
Total
 
$
95,605
   
$
86,925
     
10
%
 
$
81,773
     
6
%
Intersegment revenue
 
$
7,120
   
$
7,615
     
(7
%)
 
$
6,128
     
24
%
Earnings before income taxes
 
$
7,704
   
$
8,465
     
(9
%)
 
$
8,472
     
0
%
 
Intersegment revenues for the Company's insurance operations are primarily interest income from the warehouse line provided to SecurityNational Mortgage Company. Profitability in 2016 has decreased due to a decrease in realized gains on investments and other assets, which was partially offset by an increase in net investment income and an increase in insurance premiums.
18


Cemetery and Mortuary Operations

The following table shows the condensed financial results for the Company's cemetery and mortuary operations for the years ended December 31, 2016, 2015 and 2014. See Note 14 of the Notes to Consolidated Financial Statements.

   
Years ended December 31
(in thousands of dollars)
 
   
2016
   
2015
   
2016 vs 2015 % Increase
 (Decrease)
   
2014
   
2015 vs 2014 % Increase
(Decrease)
 
Revenues from external customers
                             
Mortuary revenues
 
$
4,848
   
$
4,628
     
5
%
 
$
4,801
     
(4
%)
Cemetery revenues
   
7,420
     
6,874
     
8
%
   
6,625
     
4
%
Realized gains on investments and other assets
   
211
     
387
     
(45
%)
   
586
     
(34
%)
Other
   
401
     
598
     
(33
%)
   
445
     
34
%
Total
 
$
12,880
   
$
12,487
     
3
%
 
$
12,457
     
0
%
Earnings before income taxes
 
$
1,219
   
$
914
     
33
%
 
$
663
     
38
%

The majority of the realized gain in the Company's cemetery and mortuary operations in 2014 was due to the sale of real estate located in Phoenix, Arizona. Included in other revenue was rental income from residential and commercial properties purchased from Security National Life. Memorial Estates used financing provided by Security National Life to purchase these properties. The rental income was offset by property insurance, taxes, maintenance expenses and interest payments made to Security National Life. Memorial Estates recorded depreciation on these properties of $715,000, $858,000 and $945,000 for the twelve months ended December 31, 2016, 2015 and 2014, respectively.

Mortgage Operations

Approximately 64% of the Company's revenues for the fiscal year 2016 were through its wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage. Both mortgage subsidiaries are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage and EverLEND Mortgage obtain mortgage loans originated in retail offices and through independent brokers. Mortgage loans originated by the Company's mortgage subsidiaries are funded through loan purchase agreements from Security National Life and unaffiliated financial institutions.

The Company's mortgage subsidiaries receive fees from the borrowers and secondary fees from third party investors that purchase their loans. Loans originated by SecurityNational Mortgage are generally sold with mortgage servicing rights released to third party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 30% of its loan origination volume. These loans are serviced by an approved third party sub-servicer.

For the twelve months ended December 31, 2016, 2015 and 2014, SecurityNational Mortgage originated and sold 16,022 loans ($3,097,872,000 total volume), 14,976 loans ($2,843,455,000 total volume), and 10,794 loans ($2,037,337,000 total volume), respectively. For the twelve months ended December 31, 2016, 2015 and 2014, EverLEND Mortgage originated and sold three loans ($838,000 total volume), 79 loans ($17,949,000 total volume), and 33 loans ($7,298,000 total volume), respectively.
19


The following table shows the condensed financial results for the Company's mortgage operations for the years ended 2016, 2015 and 2014.  See Note 14 and Note 21 of the Notes to Consolidated Financial Statements.

   
Years ended December 31
(in thousands of dollars)
 
   
2016
   
2015
   
2016 vs 2015 % Increase
(Decrease)
   
2014
   
2015 vs 2014 % Increase
(Decrease)
 
Revenues from external customers:
                             
Revenues from loan originations
 
$
149,338
   
$
139,042
     
7
%
 
$
103,248
     
35
%
Secondary gains from investors
   
34,677
     
34,211
     
1
%
   
21,862
     
56
%
Total
 
$
184,015
   
$
173,253
     
6
%
 
$
125,110
     
38
%
Earnings before income taxes
 
$
11,817
   
$
11,846
     
0
%
 
$
3,788
     
213
%

The increase in revenues for the Company's mortgage operations for the twelve months ended December 31, 2016 as compared to December 31, 2015 was due to an increase in mortgage loan originations and fee income from the loan originations.

Mortgage Loan Loss Settlements

Future loan losses can be extremely difficult to estimate.  However, management believes that the Company's reserve methodology and its current practice of property preservation allow it to estimate potential losses on loans sold. The amounts expensed for loan losses in years ended December 31, 2016 and 2015 were $4,689,000 and $6,295,000, respectively. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2016 and 2015, the balances were $628,000 and $2,806,000, respectively.

Settlement of Investigation by U.S. Department of Justice and the Office of the Inspector General for the U.S. Department of Housing and Urban Development (HUD) of Certain FHA-Insured Mortgage Loans Originated

On September 30, 2016, the Company, through its wholly owned subsidiary, SecurityNational Mortgage, announced the execution of a settlement agreement with the U.S. Department of Justice and the United States Attorney's Office in connection with the origination and underwriting by SecurityNational Mortgage of certain Federal Housing Administration (FHA) insured loans.  SecurityNational Mortgage, like many other high volume FHA-approved lenders, was being reviewed by the U.S. Department of Justice and the Office of the Inspector General of the U.S. Department of Housing and Urban Development (HUD) for loan origination activities that occurred as long as nine years ago.

Without any admission of liability and in order to avoid the extended distractions and expenses associated with protracted litigation, SecurityNational Mortgage made a business decision to resolve this matter.  Pursuant to the settlement agreement, SecurityNational Mortgage was required to make a payment in the amount of $4,250,000 to the U.S. Department of Justice, which payment was made on October 4, 2016. SecurityNational Mortgage continues to be able to originate FHA-insured mortgage loans and participate fully in all FHA programs as this settlement agreement does not affect SecurityNational Mortgage's status with the Department of Housing and Urban Development.  In addition, this settlement does not include any allegations or findings against any particular individuals, such as officers, directors, employees or agents of SecurityNational Mortgage.

Mortgage Loan Loss Litigation

For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers and Aurora Loan Services, reference is to Part I, Item 3. Legal Proceedings.

Significant Accounting Policies

The following is a brief summary of our significant accounting policies and a review of our most critical accounting estimates. See Note 1 of the Notes to Consolidated Financial Statements.

Insurance Operations

In accordance with generally accepted accounting principles in the United States of America (GAAP), premiums and other considerations received for interest sensitive products are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for these products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses.
20


The Company receives investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements.

Premiums and other considerations received for traditional life insurance products are recognized as revenues when due. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits.

The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued. For interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted when the Company revises the estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.

Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year on the level of claims incurred under insurance retention limits. The profitability of the Company is primarily affected by fluctuations in mortality, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency. The Company has the ability to mitigate adverse experience through sound underwriting, asset and liability duration matching, sound actuarial practices, adjustments to credited interest rates, policyholder dividends and cost of insurance charges.

Cemetery and Mortuary Operations

Pre-need sales of funeral services and caskets, including revenue and costs associated with the sales of pre-need funeral services and caskets, are deferred until the services are performed or the caskets are delivered.

Pre-need sales of cemetery interment rights (cemetery burial property), including revenue and costs associated with the sales of pre-need cemetery interment rights, are recognized in accordance with the retail land sales provisions of GAAP. Under GAAP, recognition of revenue and associated costs from constructed cemetery property must be deferred until a minimum percentage of the sales price has been collected. Revenues related to the pre-need sale of unconstructed cemetery property will be deferred until such property is constructed and meets the criteria of GAAP, described above.

Pre-need sales of cemetery merchandise (primarily markers and vaults), including revenue and costs associated with the sales of pre-need cemetery merchandise, are deferred until the merchandise is delivered.

Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees), including revenue and costs associated with the sales of pre-need cemetery services, are deferred until the services are performed.

Prearranged funeral and pre-need cemetery customer obtaining costs, including costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of GAAP related to Financial Services - Insurance. Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business, are deferred until the merchandise is delivered or services are performed.

Revenues and costs for at‑need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured, and there are no significant obligations remaining.
21


Mortgage Operations

Mortgage fee income consists of origination fees, processing fees and certain other income related to the origination and sale of mortgage loans. For mortgage loans sold to third party investors, mortgage fee income and related expenses are recognized pursuant to GAAP at the time the sales of the mortgage loans comply with the sales criteria for the transfer of financial assets. The sales criteria are as follows: (i) the transferred assets have been isolated from the Company and its creditors, (ii) the transferee has the right to pledge or exchange the mortgage, and (iii) the Company does not maintain effective control over the transferred mortgage.

The Company must determine that all three sales criteria are met at the time a mortgage loan is funded. All rights and title to the mortgage loans are assigned to unrelated financial institution investors, including investor commitments for the loans made prior to warehouse banks purchasing the loans under the purchase commitments.

The Company sells mortgage loans to third party investors without recourse. It may be required, however, to repurchase a loan or pay a fee instead of repurchase under certain events, which include the following:

·
Failure to deliver original documents specified by the investor,
·
The existence of misrepresentation or fraud in the origination of the loan,
·
The loan becomes delinquent due to nonpayment during the first several months after it is sold,
·
Early pay-off of a loan, as defined by the agreements,
·
Excessive time to settle a loan,
·
Investor declines purchase, and
·
Discontinued product and expired commitment.

Loan purchase commitments generally specify a date 30 to 45 days after delivery upon which the underlying loans should be settled. Depending on market conditions, these commitment settlement dates can be extended at a cost to the Company.

It is the Company's policy to cure any documentation problems regarding such loans at a minimal cost for up to a six-month time period and to pursue efforts to enforce loan purchase commitments from third-party investors concerning the loans. The Company believes that six months allows adequate time to remedy any documentation issues, to enforce purchase commitments, and to exhaust other alternatives. Remedial methods include the following:

·
Research reasons for rejection,
·
Provide additional documents,
·
Request investor exceptions,
·
Appeal rejection decision to purchase committee, and
·
Commit to secondary investors.

Once purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six-month time period, the loans are repurchased and transferred to the long-term investment portfolio at the lower of cost or fair value and the previously recorded sales revenue is reversed. Any loan that later becomes delinquent is evaluated by the Company at that time and any impairment is adjusted accordingly.
Determining lower of cost or market . Cost is equal to the amount paid to the warehouse bank and the amount originally funded by the Company. Market value, while often difficult to determine, is based on the following guidelines:

·
For loans that have an active market, the Company uses the market price on the repurchase date.
·
For loans where there is no market but there is a similar product, the Company uses the market value for the similar product on the repurchase date.
·
For loans where no active market exists on the repurchase date, the Company determines that the unpaid principal balance best approximates the market value on the repurchase date, after considering the fair value of the underlying real estate collateral and estimated future cash flows.

The appraised value of the real estate underlying the original mortgage loan adds significance to the Company's determination of fair value because, if the loan becomes delinquent, the Company has sufficient value to collect the unpaid principal balance or the carrying value of the loan. In determining the market value on the date of repurchase, the Company considers the total value of all of the loans because any sale of loans would be made as a pool.
22


Loans that have been foreclosed are reclassified as real estate held for investment. The Company carries the foreclosed properties in either Security National Life, Memorial Estates, or SecurityNational Mortgage and rents the properties until it is deemed economically desirable to sell them.

The majority of loans originated are sold to third party investors. The amounts sold to investors are shown on the balance sheet as mortgage loans sold to investors, and include the fees due from the investors.

Use of Significant Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the financial statements. The following is a summary of our significant accounting estimates, and critical issues that impact them:

Loan Commitments

The Company estimates the fair value of a mortgage loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment net of estimated commission expense. The change in fair value of the underlying mortgage loan is measured from the date the mortgage loan commitment is issued and is shown net of related expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company's recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.

Deferred Acquisition Costs

Amortization of deferred policy acquisition costs for interest sensitive products is dependent upon estimates of current and future gross profits or margins on this business. Key assumptions used include the following: yield on investments supporting the liabilities, amount of interest or dividends credited to the policies, amount of policy fees and charges, amount of expenses necessary to maintain the policies, amount of death and surrender benefits, and the length of time the policies will stay in force.

For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally "locked in" at the date the policies are issued.

Value of Business Acquired